Time-based Rates in VT

1. Time-based Rates in VT Jürgen Weiss LECG, LLC jweiss@lecg.com Workshop on Smart Meters and Time-based Rates Montpelier, Vermont March 15, 2006 Jürgen Weiss – Time-based Rates in VT

2. Presentation Overview • The Conclusion Upfront • Benefits of Time-based Rates • RTP versus other time-based rates • Experience with time-based rates • The role of “smart” metering • Some implementation issues • Proposed next steps for Vermont Jürgen Weiss – Time-based Rates in VT

3. RTP and smart metering will come, so let us figure out not “if” but “how”! • Practically universal agreement among academics that inelastic demand is a serious structural problem of electricity markets leading to substantial additional costs to society • The technology and market information now exist to address the problem • The benefits of doing so today very likely exceed the cost of doing so. • There are serious incentive issues that need to be and should be addressed • The focus should be on how to do this! Jürgen Weiss – Time-based Rates in VT

4. Time-based Rates have important benefits for consumers, utilities and society • They reflect the opportunity cost of resources • Properly designed, they will lead to • Better functioning wholesale markets (market power, efficiency) • Lower short term costs (fuel, line losses, congestion charges) • Lower long term costs (peaker capacity, T&D upgrades) • Higher System Reliability (load reduction during emergencies) • Better Risk Management (lower price volatility, co-location of risk and decision making) • Better Customer Service (Information, Choice, Control, Diagnostics) • Maybe lower emissions (not so clear) • Long-term benefits likely much greater than short term benefits Jürgen Weiss – Time-based Rates in VT

5. Among ToU rates, RTP is the right theoretical solution… • Very old and established economic literature on peak load pricing and more recently real time pricing • Current system leads to inefficient consumption and hence too much supply • Absence of RTP obscures alternatives to generation or transmission investment • Absence of RTP means that there is a cross-subsidy: those customers who could change consumption patterns subsidize those who cannot; off-peak customers subsidize on-peak customers Jürgen Weiss – Time-based Rates in VT

6. … and feasible for all customer classes • Industry “consensus”: • RTP maybe for large C+I, ToU rates for everyone else (also recommended by recent DoE report to Congress) • Current argument against RTP for all customer classes: • Metering and related infrastructure too expensive for residential and maybe small C+I customers • However, • Metering and related costs are decreasing rapidly • RTP is the right answer, ToU rates require similar infrastructure and are certain to have lower benefits • In some ways, RTP is easier to understand (you can look up the market price online – it exists, unlike some ToU price) Jürgen Weiss – Time-based Rates in VT

7. Utilities should like RTP and time-sensitive rates ToU/RTP provides a better allocation of risk • Reduces utility exposure to high and super-high prices • Results in lower power purchasing costs • Results in lower risk and should therefore lower CoC • If current rates include a risk premium for price volatility, RTP revenues may be lower but the decrease in revenue should be offset by lower CoC • Open question: Relationship of VT rates to NEPOOL real-time prices Jürgen Weiss – Time-based Rates in VT

8. …but it is important to create the right incentives for consumers AND utilities • Legitimate Fear: Will RTP lead to utilities not meeting their revenue requirement and hence not cover fixed costs? • The Answer: It depends • Whether or not RTP leads to net conservation • Relationship between current rates, RTPs and CoC • IF conservation is a desired by-product • Re-examine current utility rate structure to make sure there is decoupling of revenues from fixed cost recovery so that utilities can recover fixed costs • Related: Is there still a utility preference for assets? • The famous A-J Effect • If so, what are possible solutions? • Include metering and related equipment in asset base? Jürgen Weiss – Time-based Rates in VT

9. Potential longer term benefits should also be considered. • Paradigm shift for consumers, creating awareness of electricity consumption more generally (including the time pattern) • Important first step towards any real conservation effort • Creates incentives for technological innovation • Hardware/software to shift load and/or reduce load during high price periods • Likely to result in significant additional short-run elasticity in the long run • Energy Smart Pricing Plan experience has revealed that some of these benefits may materialize from the start Jürgen Weiss – Time-based Rates in VT

10. RTP does NOT mean hugely fluctuating customers bills • Risk to consumers often cited in opposition to residential RTP • But it is possible to separate Real-time-pricing from how a customer’s bill is calculated • Can have bill reflect the average real-time price over the past X months • Results in relatively smooth monthly bill (probably just as smooth as current bills) • Does not take away the incentive to reduce consumption during high-priced hours • Precedent: Existing Pricing plans to smooth out monthly bill fluctuations • Other “smoothing” options exist as well • RTP for incremental use (“base year” problems) Jürgen Weiss – Time-based Rates in VT

11. Limited experience with ToU Rates including RTP (for residential) • No short-run experience will tell the long-term story • Many time-sensitive rate offerings “hidden” or offered at a relatively high price • Lack of commitment and marketing • Some encouraging recent experiences • Energy Smart Pricing Plan • CA Critical Peak Pricing Pilots Jürgen Weiss – Time-based Rates in VT

12. “Experience” with RTP needs to be interpreted with care • Pilots have done their job of “proof of concept” • Pilots have not revealed the full set of benefits • The “missing link” of technology to support changes in consumption • Software (home automation, energy use monitoring, etc.) • Hardware (smart appliances, thermostats, etc.) • Some early signs that providing the link will help • CA 2004/2005 Pilots very encouraging • Invensys GoodWatts ongoing in other places (Ashland, OR, Nevada Power, etc) • Other emerging platforms (GoodCents) Jürgen Weiss – Time-based Rates in VT

13. Full benefits require a long-term commit-ment to smart metering and proper rates • Pilots do show that • Consumers like choice, information and control • All rate classes exhibit substantial elasticity of demand • Particularly strong evidence on critical peak pricing so far • Some of the elasticity likely due to novelty and will/would wear off unless • Long term commitment to time-sensitive rates (probably RTP) • Movement over time from optional to mandatory? • Technology costs will continue to decline • Current level “complete residential system” cost high (only pilots) • If deployed at large scale: $500+ • Longer term goal $200-$300 (meter, programmable thermostats, DLC devices, software) Jürgen Weiss – Time-based Rates in VT

14. What is a smart meter? Smart meters: • Look like standard digital meters and fit into a standard meter base (modifications are not necessary for most installations); • Measure and store electricity consumption data over short time periods, usually an hour; • Communicate electricity consumption data automatically to a central computer, usually by radio frequency or power line communications; and  • Do not automate any customer equipment or electricity usage patterns. (Definition from Hydro Ottawa website, www.hydroottawa.com) Jürgen Weiss – Time-based Rates in VT

15. Smart meters are quickly becoming an economic “no-brainer” • Substantial evidence that AMI likely pays for itself (without DR benefits) • Residential Meter installed+software $100/meter +<$1/month cost • Pay-back periods of 6-7 years • Non-DR related benefits to utilities include • Less power theft • More accurate meter readings • Saved labor cost of manual/drive-by meter readings • Better distribution system control and planning • Significant savings come from state/utility-wide deployment of AMI • Cost of installment • Maximum benefits to utility from AMI-based activities • Possible discounts on purchase price Jürgen Weiss – Time-based Rates in VT

16. ..and more and more regions move towards system-wide deployment • System-wide deployment makes sense and is cost-effective at multiple scales • From very large • Italy (30,000,000 advanced meters, over 20m deployed), Victoria (Australia), Ontario (Canada), Sweden, CA • To pretty small • Shawano, WI (6,000 meters) • Vermont should seriously consider moving to state-wide AMI mandate Jürgen Weiss – Time-based Rates in VT

17. There are significant additional benefits for utilities, consumers, and society • Advanced metering infrastructure is a necessary condition for implementing RTP and other time-sensitive rate structures. • Permits a better understanding of localized consumption patterns and demand response opportunities with corresponding better planning of infrastructure development (T&D,etc). • Advanced metering will help evaluate DG resources and - through RTP – would increase the value of some DG • Appliance-level metering will provide additional benefits Jürgen Weiss – Time-based Rates in VT

18. Since smart metering will likely lower costs, funding should be possible • Most business cases now conclude positive NPV without additional charges for meter • I.e. operational savings exceed cost of meter on NPV basis • Typical pay-back periods 6-10 years • Some states allow cost recovery, others silent • Could allow cost recovery but subject to utility showing that costs have actually increased. • Impact on Asset base? • Could charge for the meter, but should result in lower rates over time (if positive NPV for utility without charge) • Some utilities offering demand response plans do charge • In VT possible legitimate capital constraints (Possible role for Efficiency Vermont?) Jürgen Weiss – Time-based Rates in VT

19. There is much room to expand RTP and related rates in Vermont • Many VT customers are already familiar with time of use rates, past and present • Ripple Control • Existing ToU rates • BUT: Existing time-of-use rates are • Not generally RTP, but simpler time-of-use rates • If mandatory ToU, limited to larger customer classes • RTP for all customer classes should be the end goal, but may not be achievable right away • Phase-in of RTP over time for all customer classes • More choices may be good BUT • Avoid confusion and too much administrative effort • It will take a real commitment to make it work Jürgen Weiss – Time-based Rates in VT

20. How should Vermont proceed as a State • Statewide/Utility-wide Advanced Metering should be seriously considered • Cost advantages from larger quantities • Could be faced in over time • Real-time Pricing Pilots as a transition to permanent default solution • Make it “cool” to participate • Learn not so much about customer response, but about implementation issues • Vermont should send a clear signal that RTP is coming and is here to stay! • Provide proper incentives for customers • Provide proper signal to vendors • The bigger question: • Mandatory RTP versus voluntary RTP Jürgen Weiss – Time-based Rates in VT

21. Jürgen Weiss Director, LECG, LLC (617) 792.9055 Jweiss@lecg.com Jürgen Weiss – Time-based Rates in VT